Description

The unsolicited takeover attempt situation

In 1Q2010 ADP made public an unsolicited proposal to acquire ARG and subsequently commenced a $60 per share cash tender offer for all outstanding shares of common stock of the Company. ARG by unanimous vote at a meeting on February, determined that the offer was inadequate and not in the best interests of ARG stockholders. Mid summer, ADP revised its tender offer to $63.50 per share in cash. Once again, ARG determined that the revised tender offer was inadequate. Sure enough, last fall, APD revised its tender offer for a third time to $65.50 per share in cash. ARG declined again.  In an interesting move, ADP initiated a proxy contest to elect three directors to Airgas' Board and to amend certain provisions of the ARG's By-Laws. At the annual meeting of stockholders of ARG on September 15, the three nominees of Air Products were elected to the ARG's Board of Directors.  ADP makes what appears to be a "final" bid for ARG at $70 per share after ARG enacted a poison pill.  Indeed, "if an annual meeting is held on January 18, 2011, ADP has stated publicly its intent to nominate additional candidates for election to the ARG Board of Directors. If the individuals nominated by ADP were to be elected to ARG's board, the change in the composition of the ARG Board of Directors would constitute a "change in control" under the terms of Airgas' Amended pill. Such an event would trigger a substantial charge to earnings as a result of accelerated vesting of all unvested equity compensation previously awarded ... The acceleration of vesting on stock options requires that all unamortized non-cash compensation expense associated with these options be recognized in the period of acceleration..."

An interesting request last week: the Delaware Court Judge hearing the case regarding the validaty of ARG's poison pill, has asked ARG's Board to provide evidence as to why it thinks the $70 offer made by ADP is inadequate.  ARG has until January 25 to convice the Courts that $70 is not enough fro their business; In the meantime, APD is likely to extend its offer for the company (wich expire mid-January) until then the end of the month. 

 Unique Fundamentals

ARG is well-positioned to take advantage of secular trends.  ARG's end markets are showing continued improvement. Due to the fact that many of Airgas's products are consumed during use, there is a potential for a solid rise in product demand as inventory levels at the end user remain very low. On the gas side, key markets such as medical and laboratory, emmission control and monitoring gases, as well as other specialty gas applications such as lasers continue to post impressive growth. There is also increased interest in private label products as well as opportunities for vendor consolidation and cross-selling. With 25% market share and roughly $4 billion in sales, Airgas is the leading distributor of packaged gases and related hardgoods. Airgas has a unique national footprint and a low cost position due to its long-term supply agreements.  Specifically, ARG is uniquely positioned to benefit from the ongoing market improvements.  The pace of vendor consolidation is likely to continue and with ARG's broad product offering and over 1,000 locations makes them the defacto front runner to win additional business.  Also, the benefits associated with the SAP conversion and the resumption of acquisition activity provides further upside to earnings.

 Value/worth

 ARG values itself: $78

ADP's current offer for ARG: $70.

ARG value base on Comps: $65

ADP's first offer for ARG 11 months ago: $60

Comps: EV/EBITDA NTM

PX: 10.2x

APD: 9.2x

ARG: 8.6x

I expect the outcome with Air Products to be resolved within six weeks by the Delaware Court Judge.  Should ADP walk away from the offer, I would expect ARG shares to drop modestly for a day before value investors step in large quantities.  Still, ARG has many options to help unlock value.  For example, ARG could buy back stock (perhaps a Dutch tender).  Doing so could add $3-$8 in equity value without going beyond leverage multiples ARG has carried with ease in the past.  Investors may start to look out to 2013-2014, when the structural benefits of ARG's own productivity initiatives and SAP implementation start to bear fruit.  Macro indicators point towards more growth as the composite ISM index has now been above the key 50 level (an indicator for growth) for fourteen consecutive months.  Rail shipments of fabricated metal products support this recovery.  Also, increased steel production leads to more fabrication demand.  Indeed, through October, total global steel production is up nearly 18% vs. the same ten-month period in CY09. Even more impressive is that the CY10 production volumes are up almost 2.5% vs. CY08 levels. If ADP walks away from its offer I expect ARG shares to trade to $58-$60, trough valuations.  If the sector/economy turns negative is also a risk.

About the company

Airgas, Inc. (ARG) is the largest U.S. distributor of industrial, medical, and specialty gases (delivered in "packaged" or cylinder form), and hardgoods, such as welding equipment and supplies. Airgas is also one of the largest U.S. distributors of safety products, the largest U.S. producer of nitrous oxide and dry ice, the largest liquid carbon dioxide producer in the Southeast, and a leading distributor of process chemicals, refrigerants, and ammonia products. ARG markets these products to its diversified customer base through multiple sales channels including branch-based sales representatives, retail stores, strategic customer account programs, telesales, catalogs, eBusiness and independent distributors. Products reach customers through an integrated network of more than 14,000 employees and approximately 1,100 locations including branches, retail stores, packaged gas fill plants, cylinder testing facilities, specialty gas labs, production facilities and distribution centers.

ARG has two reporting segments, Distribution and All Other Operations. The Distribution business segment primarily engages in the distribution of industrial, medical and specialty gases and hardgoods, and in the production of gases to supply the regional distribution companies. The All Other Operations business segment consists of six business units which primarily manufacture and/or distribute carbon dioxide, dry ice, nitrous oxide, ammonia and refrigerant gases.

Catalyst

2. Judge upholds poison pill and ARG shares fall to perhaps $59 before rising up to $65 per share (reasonable, fair value based on comparable valuations).

3. Stand sill languishes and ARG's shares rise based on the continued, improved sector fundamentals.